Disconnect widens between base rates and LIBOR

WTF?_2

Mark-W wrote: »

Another misleading article, as stated the 'widening' was only for 24hrs due to the lag in boe decision and the next libor rate being set, not even news worthy.

The fact the the libor dropped over night is news worthy, however i doubt very much it will make the 6 or 9 oclock news tonight, which is odd as when it went up .25% it was the end of the world according to bbc/itv.

Thanks generali for clearing things up for those who have no idea how the system works... not mentioning any names :rotfl:

the libor rate wil continue to drop in the coming weeks, and months just as it has doen since the bail out, although its seldom reported.

Of course the LIBOR dropped - how could it not with a 1.5% base rate cut?

The point is that it didn't drop by as much as the base rate - hence the spread has widened. Peston was wrong that it only dropped by 0.75% - it dropped by a percent (still 50bps less than the base rate cut).

Therefore base rates are even less relevant to real rates than they were before the cut, making the MPC look rather redundant.

WTF?_2

purch wrote: »

Hasn't this been covered on other threads ??

In fact I am sure I was typing something very similar yesterday...

Base Rates have never been an effective tool for anything....but it's just about all they have, so they try to make everyone believe they can influence matters.

Myabe, maybe not (on the base rates) - but for sure as they make decisions more at odds with what is achievable in the real economy, it undermines the credibility that exists of them being able to set policies which make a real difference.

purch

Setting the BBA LIBOR's

This is basically how it works....

1. Phone Rings in Dealing Room
2. Everyone ignores it
3. Continues Ringing (actually light flashing on dealing board..but same thing)
4. Someone finally answers....Hello, Conman & Co, can I help?
5. Voice says....hello this is Doris from BBA, can I have your Sterling LIBOR's
6. Person who answered phone shouts out "Someone ere wants Sterling LIBOR's ??"
7. No one answers him.
8. Then someone else says..."He's at Lunch"
9. Bloke who answered phone mutters to himself "F*c%ing Hell"....say's "hang on luv" to woman on end on line.
10. Then he types in the code for the Reuters page that shows GBP Interbank rates.
11. Reads the rates on that screen to woman from BBA
12. Puts down handset and vows never to bother answering phone again !!!

If that happens in every dealing room across London, then the LIBOR's are set based on what Reuters have on their screen at the time, but hopefully enough Sterling Cash traders are not at lunch every day, for the LIBOR's to be set somewhere close to where they should be.

The BBA do disregard the highest and lowest quotes in order to get a better average, because on any given day, especially settlement days different Banks will have a reason for either a high or low LIBOR to be fixed to suit their "book"


P.S. I am wrong about the GBP LIBOR being Eurosterling, (all the others are) the LIBOT has to be adjusted to settle Futures etc

Mark-W_2

The 'widening' will reduce over the coming days and weeks, you cant expect the market to respond so quicly to a huge unforseen cut.

!!!!!! how do you manage to post 3,000,000 a day, everyday?

HammersFan

Oh dear !!!!!!. Not a good day for you old chap. Look at how all the banks and building societys are slashing their SVR's. I'll be using all the savings to hammer down my mortgage if that's any consolation.

kennyboy66_2

!!!!!!? wrote: »

Myabe, maybe not (on the base rates) - but for sure as they make decisions more at odds with what is achievable in the real economy, it undermines the credibility that exists of them being able to set policies which make a real difference.

I think your barking up the wrong tree here.

It does not undermine their credibility at all.

Do you seriously think that they thought that cutting rates would bring Libor down by the exact same %.
They knew almost exactly what would happen.

If it undermines anyones credibility it should be politicians who should know better than spout sound bites about how the banks should pass the full cut on.
Either they are being thick or playing to the gallery.

Probably both.

Generali

kennyboy66 wrote: »

Either they are being thick or playing to the gallery.

Probably both.

Spot on. If banks should have cut their SVRs by 200bps in the last month, why hasn't Northern Rock done it? I'll give you a clue*: as Northern Rock is a nationalised bank it is illegal under European law for it to receive a Government subsidy. As a result, its SVR must be above the cost of funding that lending plus cost of running the mortgage book plus risk of losses.


*Actually it's the answer.

StevieJ

!!!!!!? wrote: »

Are central bank interest rates even relevant as a tool, any more?

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/11/how_much_should_banks_cut_rate.html

So the spread between real world and politically set rates has just increased by another 0.75%.

You have to wonder if base rates can be considered an effective tool for economic management any more, which leaves the MPC where?

You really do disappoint me, this is not how a bull is supposed to conduct himself.
Rates 3% , sorry when did I tell you we would have rates of 3% to combat deflation, oh but the banks wont follow :rotfl::rotfl::rotfl:

WTF?_2

HammersFan wrote: »

Oh dear !!!!!!. Not a good day for you old chap. Look at how all the banks and building societys are slashing their SVR's. I'll be using all the savings to hammer down my mortgage if that's any consolation.

Sorry, but how is the fact that the government has coerced the banks it supports into cutting their rates to match base rate cuts 'not a good day' for me?

I guess you could say it is a pretty bad day for everyone, and by extension me, because what they have done means that the banks are taking a loss (the rates they borrow at haven't come down by 1.5%) and the results will be no doubt subsidised by taxpayers chucking more money at keeping the banks afloat in the longer run because of it - it that what you meant? Oh yeah, and savers will be reamed even more and since I have savings, that's also bad for me on the face of things. Lucky the price of what they are going to eventually buy is coming down by around 13% a year though so I'm not too devastated at the loss of a percent and a half of interest.


In the meantime, if the general public get some extra relief out of the situation (which is being funded by taxpayers) it's better than nothing but the price will be high in the longer term.

WTF?_2

kennyboy66 wrote: »

I think your barking up the wrong tree here.

It does not undermine their credibility at all.

Do you seriously think that they thought that cutting rates would bring Libor down by the exact same %.
They knew almost exactly what would happen.

If it undermines anyones credibility it should be politicians who should know better than spout sound bites about how the banks should pass the full cut on.
Either they are being thick or playing to the gallery.

Probably both.

So what's your view on the banks which have subsequently passed the cut on in full after a bit of government arm twisting? Are you happy about that or does it not at least start some alarm bells ringing?


They have cut their lending charges by more than the cost of their own borrowing has fallen. Not exactly good business sense - unless of course someone has promised to make up the difference somehow.....

.... Hmmmm , I'm sure there must be some sort of common factor linking the banks which have cut but I can't quite put my finger on it.


Looks to me like the government is determined to run a loss-making public banking sector, funded with taxpayer cash or freshly printed money, with the goal of keeping debt repayments low.

But new lending has been vastly reduced with products being withdrawn and repriced meaning that new FTBs are going to find it harder than ever to get a mortgage.


This is robbing Peter to pay Paul. The cost of buying a mortgage repayment cut for existing debtors is to further shut out new buyers and rip off savers and the taxpayer.